PPPs have large transaction costs related to their design and negotiation, and they require an ongoing expense for the monitoring of performance and enforcement of standards. These expenses suggest that public sector savings are greatest for large scale projects, where there is a large potential for efficiencies by the private partner. In contrast, smaller projects may not generate enough savings to offset their individual transaction and monitoring costs; however, other models have been developed to accommodate smaller projects.
PPPs have been used for many large scale projects. While the median value for a PPP is $170 million, 25 percent of projects have values above $455 million. Approximately 10 percent of projects have values over $1 billion; these 107 projects account for 60 percent of the worldwide value of all PPPs.37 These include projects from all sectors, such as the $2.5 billion contract for Eleftherios Venizelos Airport in Greece, the $5 billion contract for Allenby-Connaught Army Base in Great Britain, the $3.3 billion contract for the Gautrain Express Rail Line in South Africa, the $5.4 billion contract for Madrid Calle 30 (M-30) in Spain, the $1.75 billion contract for the Taipei Port, and $1 billion Project Omega Wastewater Treatment in Northern Ireland.
Only ten percent of projects have values less than $30 million. For smaller projects, studies of the PFI in the United Kingdom found that the relatively high transaction costs reduced the value of the approach. The procurement period was just as lengthy as that of larger projects, averaging two and a half years, since the same level of legal and technical documentation was required. Furthermore, the cost of doing so for the private partner often was often out of proportion to the size of the project, driving up the relative cost. As a result, PFI is no longer considered as an option for projects with a capital value less than £20 million.38
To accommodate these smaller projects, the British have developed a model, called "strategic partnerships," that reduces the transactional costs for smaller projects by batching similar projects together. The two major strategic partnerships in the U.K are in health and education. The first is Local Improvement Finance Trusts (LIFT), a ten-year, £1 billion investment by the Department of Health to build one-stop primary health care centers. (This supplements a previous nationally funded program to use PPPs for hospital construction by Hospital Trusts.) The second is the Building Schools for the Future initiative to upgrade all secondary schools over 15 years. Planned spending for this initiative is £2-3 billion a year over a 15-year period. Because the goals are ambitious, the work occurs in phases, with only a portion of buildings being built or renovated in each phase of work.
Using national funding, local governments work with joint public-private sector organizations-composed of the appropriate government agency and Partnerships UK, a nonprofit PPP dedicated to promoting best practices- to create a strategic planning framework. The local governments then work exclusively with one private partner to deliver the assets. Some limited early evidence suggests improved expertise, reduced transaction costs and procurement times, and efficiencies, such as economies of scale and improved supply chain management, throughout the life of the partnership.39
___________________________________________________________________________
37 CBC analysis of data from International Major Projects Survey, October 2007 edition, published by Public Works Financing. CBC analysis of data excludes contracts characterized as DBs, asset sales, joint development agreements and management contracts. For most projects, values recorded in the database represent project capital costs as estimated in the year the contracts were signed, except for select entries updated by CBC.
38 HM Treasury, "PFI: Meeting the Investment Challenge." July 2003. Available online at http://www.hm-treasury.gov.uk/media/F/7/PFI_604a.pdf.
39 HM Treasury. "PFI: Strengthening long-term partnerships." March 2006. Available online at http://www.hm-treasury.gov.uk/media/7/F/bud06_pfi_618.pdf.